Jun 272014

Recommendation 17 of the Senate Economics References Committee final report (26/6/2014) on the performance of the Australian Securities and Investments Commission (ASIC) is:

“… that  ASIC,  in  collaboration  with  the Australian  Restructuring  Insolvency  and  Turnaround  Association  and accounting  bodies,  develop  a  self-rating  system,  or  similar  mechanism,  for statutory  reports  lodged  by  insolvency  practitioners  and  auditors  under  the Corporations  Act  2001  to  assist  ASIC  identify  reports  that  require  the  most urgent attention and investigation.” (Page 244, para. 15.66)

Source: Final report of Senate Economics References Committee on Performance of the Australian Securities and Investments Commission, 26/6/2014 

Committee’s comments preceding this recommendation

Before making recommendation 17 the Senate Committee’s Report looks at “Reports from industry professionals”  including external administrators. It states as follows (note: I’ve removed its footnotes):


External administrators

15.55  The  Corporations  Act  also  places an obligation on liquidators, receivers and voluntary  administrators  (external  administrators)  to  report  suspected  breaches  of the  Corporations  Act  to  ASIC….

15.56  Reports  made  pursuant  to  these  sections  are  referred  to  as  statutory  reports and  are  an  important  source  of  information  about  possible  breaches  of  the  law….

15.57  Liquidators  also  have  the  discretion  to  lodge  further  reports  if,  in  their opinion, it is desirable to draw the matter to ASIC’s attention.

15.58  In 2012–13, external administrators lodged 9,788 reports with ASIC. Of this number,  initial  external  administrators  accounted  for  95  per  cent  or  9,254  reports. ASIC recorded  that 81 per cent of the initial reports  involved  companies with fewer than  20  employees.  The  construction  industry  was  subject  to  the  highest  number  of reports  accounting  for  just  over  24  per  cent.  Of  the  initial  external  administrators’ reports, receivers lodged one per cent under section 422; administrators lodged 3.8 per cent under section 438D; and 95 per cent of the reports were submitted by liquidators under section 533.

15.59  Importantly,  external  administrators  alleged  misconduct  in  more  than two-thirds of reports  (6,761)  involving an overall possible 16,562 breaches. Although this  number  accounts  for  an  average  of  between  two  and  three  breaches  per  report, almost  30  per  cent  of  reports  or  2,493  recorded  no  misconduct. ASIC  asked  the external administrator to prepare a supplementary section 422, section 438D or section 533  report  for  677  of  the  6,761  reports  that  identified  possible  misconduct. In its analysis of the statistics, ASIC explained  that its request for an additional report is  a  function  of  its  assessment  of  risk  based  on  a  number  of  factors,  including,  but not limited to:
*   the nature of the possible misconduct reported;
*   the amount of liabilities;
*   the deficiency suffered;
*   the availability of evidence;
*   prior misconduct; and
*   the advice of the external administrator that the reported possible misconduct warranted further investigation.

15.60  In  a 2007 report, the Australian National Audit Office (ANAO)  observed that given  the  large  number  of  statutory  reports  received  by  ASIC  each  year  that  allege offences  against  the  Corporations  Act,  it  was  appropriate  that  ASIC  had  systems  in place  to  prioritise  its  regulatory  action,  through  risk  scoring.  It  found  that  ASIC’s recording of statutory report information was accurate to  a high degree. The ANAO recognised  that  ASIC  could  use  a  wide  variety  of  possible  remedies  to  deal  with offences identified in statutory reports or other deficiencies that warranted some sort  of regulatory action. They ranged from warning letters to directors for the less serious offences  to  prosecution  and  potentially  imprisonment  for  more  serious  offences. It noted that where ASIC identified  that a statutory report raised  issues of regulatory significance,  it  sought  further  information  about  the  matter  from  the  external administrator.

15.61  According to  the ANAO  report, ASIC  did  not always obtain that additional information.  Based on its sample, it found that in 40 per cent of instances,  ASIC did not obtain additional information that it had requested. The ANAO concluded:

… the  small  number  of  statutory  reports  subject  to  regulatory  action  by ASIC  each  year  indicates  that  there  is  opportunity  for  greater  regulatory action on these reports.

15.62  Mr  David  Lombe,  President  of  the  Australian  Restructuring  Insolvency  and Turnaround Association  (ARITA)  was of the view that  ANAO’s  2007  findings  were still  relevant  and  applicable. He  noted  the  thousands  of  reports  lodged  with  ASIC each  year  but  not  acted  upon.  In  Mr  Lombe’s  view,  there  was  a  ‘general  perception within  the business community that, if you do certain things at a certain level, there will be no effective review’. He explained further:

“The difficulty that we have as official liquidators is that you get a matter off the  court  list  and  often  that  matter  has  no  funds  in  it,  so  there  are  no available assets. Often that is a process by which directors have deliberately done that—it has been a deliberate course of action. If you report the matter to ASIC and there is no assistance from that space, there is not much  you can do. If you felt really aggrieved by it or you felt that it was a matter that was  of  sufficient  importance,  you  may  be  able  to  persuade  a  firm  of solicitors to act on a pro bono basis, but that is very difficult. I found myself in  that  sort  of  situation  with  Babcock  &  Brown,  where  I  had  inadequate funds to be able to pursue a proper investigation. The only thing that was available to me was to ask creditors to fund me, which they did, which then allowed me to do a public examination, which brought out the conduct of directors and other stakeholders in that company. If you do not have funds in a matter, the courses are very limited.”

15.63  By  way  of  example,  Mr  Lombe  expanded  on  his  concerns  citing  the requirement  to  lodge  a  section  533  report,  which  deals  with  offences  committed  by directors.  He explained that for the liquidator to understand what has happened,  he or she  needs  to

  ‘review the books and records, determine the transactions, try to find out what assets are there, look at insolvent trading and look at preference payments and all those sorts of things’.

  The liquidator is  required to file that report,  which  takes  time. So, according to Mr Lombe,  the reports involve both  time and money, and often  with official liquidations there are no assets at all and, if there are, creditors are effectively paying for the report.  He noted that thousands of  such reports  are lodged  with ASIC but  most  of  them  come  back  ‘no  further  action’.  In  his  view,  it  is  frustrating  for liquidators because they feel, ‘Why am I bothering to do it?’ Mr Lombe concluded that ‘you  can  understand  someone’s  frustration,  where  they  have  reported  offences  and nothing happens’.

15.64  When asked whether liquidators, in their  statutory  reports,  could assist ASIC to  distinguish  the  very  serious  breaches  from  the  less  so,  ARITA  indicated  that  it ‘might be a useful reform’. After considering the matter further, ARITA informed the committee that if it were consulted, it could assist ASIC to determine a risk scoring profile. It explained further, however:

“But we consider that the decision on how the information required by s533 is ‘risk-scored’ for action is ultimately one for the regulator and its decision and  methods  should  not  be  publicly  disclosed.  For  one  thing,  this  would appear to give the  ‘green light’ to the  commission of certain offences that are deemed not serious enough to warrant action by ASIC.”

15.65  ARITA  also  stated  that  ‘a  more  co-operative  approach  between  ASIC  and liquidators  should  also  be  pursued’.  The  committee  believes  that  ASIC  and  ARITA should  work  closely  together  to  develop  a  more  effective  and  efficient  reporting mechanism that would assist ASIC to identify the alleged  serious  breaches from the less so.”

“Nudges” may be used by ASIC to persuade company directors to comply

 ASIC, Corporate Insolvency, Forms, Offences, Practitioners Association (IPAA), Regulation  Comments Off on “Nudges” may be used by ASIC to persuade company directors to comply
Jun 132014

A story by Michael Murray of the Australian Restructuring Insolvency & Turnaround Association (ARITA) brings news that the Australian Securities and Investments Commission (ASIC) has commissioned the Queensland University Business School to investigate “approaches that can be used to improve director co-operation with liquidators and director compliance with their statutory and other obligations”.

ASIC appears to be looking for styles of approach that are more scientific and more savvy.

The news story suggests that an approach to be considered is that of the “pure nudge”, the “assisted nudge” and the “shove”.

A “nudge” is defined in a government paper entitled “Influencing Consumer Behaviour: Improving Regulatory Design” (see below) as a change to choice architecture which influences the decision of an individual without restricting, or raising the price of, the set of choices available”.  The paper says that “under certain conditions, some evidence suggests that nudge interventions can be cost-effective relative to more direct or traditional forms of government intervention; used alongside existing regulatory approaches; targeted in influence; and easy to implement.”

ASIC seems to be keen to try the “nudges” experiment. In its April 2014 submission to the Financial Systems Inquiry ASIC recommends that it should have a more flexible regulatory toolkit such as would enable it to intervene in the financial product and service supply chain by way of ‘shoves’ and ‘nudges’ to achieve regulatory outcomes that more effectively meet the needs of investors and consumers. It suggests that simple “nudges” are likely to achieve cost-effective results in many cases.


ARITA’s news story of 6 June 2014 is headed “How Directors of Insolvent Companies [Should] Behave” and says:

“Liquidators will be aware that director compliance can be variable and that non-compliance can ultimately call for prosecution of the directors, adversely distracting liquidators from their duties and imposing costs on creditors. The behavioural economics approach seeks to influence and direct director behaviour in order to promote positive reinforcement and indirect suggestions in order to achieve compliance.

At a simple level, it could be applied to refine the form and content of letters sent by liquidators to directors stating their obligations. Improvement of the report as to the company’s financial position (the RATA) is another coalface example, ARITA research showing that it can be a daunting, unduly complex and difficult document for directors to complete: Peter Keenan, Terry Taylor Scholarship Report 2011. In some circumstances, small changes can give effect to significant behavioural changes.

ARITA sees this research as very worthwhile and it mirrors similar approaches being taken by the Australian government in other areas – see Influencing Consumer Behaviour: Improving Regulatory Design, Office of Best Practice Regulation, Department of Finance and Deregulation. Among many issues, that paper discusses the concepts of a “pure” nudge, an “assisted” nudge and ultimately a “shove”, in seeking regulatory compliance. Such approaches are used by revenue authorities in Australia and internationally. For example, in the UK, a change in the wording of letters sent to those owing income tax was claimed to have resulted in an extra £200 million in tax being collected on time.

ARITA also sees potential for research into the behaviour of directors at the pre-liquidation stage, that is, in managing a failing company that is heading towards collapse – what may usefully be used to prompt directors to take action or seek advice? to have a more real perception of the company’s financial position? to more positively react to possible insolvent trading liability and to the company’s creditors? and many other such issues.

We also see potential for this research to be applied in personal insolvency.

ARITA is monitoring the progress of this research and its outcomes. Any comments or questions? to Michael Murray, Legal Director, ARITA.

Link: Paper from Office of Best Practice Regulation in 2012 “INFLUENCING CONSUMER BEHAVIOUR: IMPROVING REGULATORY DESIGN”
Link: ASIC’s April 2014 submission to the Financial Systems Inquiry